• by Mark Walsh  @markfwal, April 10, 2008

In the latest twist in its ongoing takeover battle with Microsoft, Yahoo said Wednesday that it will begin a test running Google ads alongside Yahoo's own search results.

The two-week trial of Google's AdSense for Search service will be limited to no more than 3% of Yahoo search queries and will not include the company's network of affiliate or premium publisher partners.

But the move could lead to a broader alliance between Yahoo and Google that would bolster Yahoo's efforts to resist Microsoft's unsolicited takeover attempt. It also follows talks the companies have reportedly already held about Yahoo potentially outsourcing search ad sales to Google.

Yahoo would likely collect a majority of the revenue generated under such an arrangement.

In announcing the ad test with Google Wednesday, Yahoo reiterated that its board is continuing to explore "strategic alternatives to maximize stockholder value, including exploration of potential commercial business arrangements."

But it added that "the testing does not necessarily mean that Yahoo will join the AdSense for Search program, or that any further commercial relationship with Google will result." Yahoo also said it would not comment further on the nature or timing of any potential relationship.

Microsoft, which last week warned that it would lower its offer price if Yahoo didn't conclude a merger agreement in three weeks, quickly raised antitrust questions about Yahoo's ad test with Google.

"Any definitive agreement between Yahoo and Google would consolidate over 90% of the search advertising market in Google's hands," said Microsoft in a statement. "This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo."

Microsoft wasn't the only one. U.S. Sen. Herb Kohl (D-WI), chairman of the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights, signaled his concerns about the Yahoo-Google partnership.

"We will be following closely the results of the short-term test alliance between Yahoo and Google," he said in a statement. "Should there be moves to make this agreement permanent, we will examine it closely in the Antitrust Subcommittee to ensure that it does not harm competition."

Following on the heels of the Google's acquisition of DoubleClick, he said the Yahoo-Google alliance would represent further consolidation in the Internet advertising market.

Yahoo so far has rejected Microsoft's $31-a-share offer as "substantially undervaluing" the company, reiterated most recently in its response Monday to Microsoft's ultimatum. In exploring alternatives to a Microsoft acquisition, Yahoo has had discussions about a possible deal with companies including News Corp. and Time Warner Inc.--but so far, to no avail.

However, paidContent and Silicon Alley Insider were reporting late Wednesday that Yahoo is in serious talks with Time Warner that could lead to a Yahoo-AOL merger announcement as soon as next week. A Yahoo-Google search partnership would only sweeten the deal, with Google already owning a 5% stake in AOL. Whether that deal will actually come together remains unclear.

If nothing else, Yahoo may be hoping that its ad trial with Google will push Microsoft to boost its offer price. Earlier on Wednesday, a large Yahoo investor criticized Microsoft for threatening to lower its bid.

Bill Miller, a portfolio manager at Legg Mason, which owns 7% of Yahoo stock, told The Wall Street Journal he wasn't pleased with Microsoft's current offer, which has fallen to about $29 a share because of a drop in Microsoft's share price.